Introduction
International trade involves many different procedures that are of particular interest to study. Similarly, this sphere of human activity has its own theories and practices. This scientific paper aims to study the theory of absolute advantage. In simple words, it consists in producing more goods under the same conditions as competitors. Moreover, in order to gain a better understanding of this concept, the study will provide an analysis of how the absolute advantage differs from the comparative advantage.
Furthermore, first of all, it is necessary to consider in more detail the concept of absolute advantage. Sources determine that “a country has an absolute advantage in producing a good over another country if it uses fewer resources to produce that good.” (Absolute and comparative advantage, n.d., para. 3). This includes aspects such as invested time, finances, and human resources (Sampson, 2018). The ancestor of this theory is Adam Smith, who introduced it in 1776 (Hollander, 2019). Thus, the theory of absolute advantage largely determines the ways and actions of various countries that are associated with the production and distribution of goods.
The Theory of Absolute Advantage and Its Limitations
Resources, within the framework of the theory of absolute advantage, can be of various kinds, from natural and environmental to computer technologies and labor costs. It is these indicators that determine the difference between countries in the success of the production of a particular product or goods. Smith, the founder of the theory, believed that it is the primary metric for comparing the economic abilities and strengths of countries in international trade. This is due to the fact that each state produces only those products in which it specializes and is able to produce the best (Bellino and Fratini, 2022). Similarly, it will turn to other countries to purchase those products that it produces worse. It is this circumstance that contributes to the maintenance of international trade mechanisms.
Thus, an example could be the interaction and international trade between America and China. Hence, one of the main goods that are exported from the United States of America is oilseeds and grains, which it produces much faster than its goods exchange partner. China, in turn, supplies America with electrical machinery, which it creates with fewer resources than the United States. Furthermore, given that countries use different time and financial resources, America has an absolute advantage over China in the production of oilseeds and grains, and China succeeds in innovative technologies in the field of electrical machinery.
Limitations
Despite the simplicity of explaining the basics of the theory of absolute advantage, this concept has its limitations and disadvantages. One of the first and most important is the fact that it is based on free trade between nations. In the real world, this is impossible since economic interactions between countries take place within the framework of various kinds of rules, tariffs, and quotas. Hence, the country will not purchase products from the region next to it if these listed factors make it unprofitable. In this case, it will be easier for her to purchase goods from a country that produces a slightly worse product but has no restrictions that can increase fiscal spending.
The second negative aspect of the theory of absolute advantage is the fact that countries should focus on the product that they are able to produce the best. However, in the context of the natural world, this is impossible and may even pose some threats to countries. This is due to the influence of demand for the product; that is, if there is no demand, then the production of even the top-quality product can only become a disadvantage for the region (Tsaliki, Paraskevopoulou, and Tsoulfidis, 2018). Thus, countries focus on creating and trading several products at once and improving the production of those offers where necessary. This disadvantage can also be caused by such a limitation of the theory, which implies trade only between two participating countries exchanging one particular good (Gray, 2019). This factor also cannot be influential in reality since many manufacturers constantly exchange a large number of products with other countries. Based on these factors, it can be concluded that international trade takes place in the world according to the opposite approach, which is called comparative advantage.
Difference between the Absolute Advantage and Comparative Advantage theories
Therefore, the leading theory that opposes the postulates of absolute advantage becomes a comparative advantage. The central aspect of this approach is opportunity costs, which directly affect the choice of which products to produce in the presence of limited resources. Moreover, the country is seen as the primary source of resources that affect the choice of what it can present on the international market. When there is an alternative choice between the production of two goods, the country makes calculations and chooses the one that is most profitable in specific conditions, given the availability of certain kinds of resources.
For a better understanding of the difference between absolute and comparative advantage theories, it is vital to give an example of the second. Consequently, presumably, China, which produces various kinds of technological products for the United States of America and other countries, is considering the possibility of creating either computers or televisions. It is worth noting that at the same time, the country has enough resources to perform these actions. At the same time, in modern conditions, computers can bring China much more profit from international exchange than televisions. Henceforth, the opportunity cost is the difference in value lost from producing a tv rather than a computer.
Conclusion
In conclusion, the theory of absolute advantage lies in the country’s ability to produce goods of the highest quality and faster with the same resources as competitors. Despite this theory’s initial ease of application, it is not applicable in real life since the market exists following comparative advantage, which is based on the opportunity costs of manufactured goods. In addition, the disadvantages of the theory of absolute production include that it is based on free trade between nations and considers that countries should distribute the product that they can produce better than others, which is also incorrect.
Reference List
Absolute and comparative advantage (n.d.) Web.
Bellino, E. and Fratini, S.M. (2022) ‘Absolute advantages and capital mobility in international trade theory’, The European Journal of the History of Economic Thought, 29(2), pp.271-293.
Gray, H.P. (2019) Services in world economic growth. Oxford: Routledge.
Hollander, S. (2019) The economics of Adam Smith. The Economics of Adam Smith. Toronto: University of Toronto Press.
Sampson, G.P. (2018) ‘Challenges facing the world trade organization: An overview’, Australian Economic Review, 51(4), pp.453-473.
Tsaliki, P., Paraskevopoulou, C. and Tsoulfidis, L. (2018) ‘Unequal exchange and absolute cost advantage: Evidence from the trade between Greece and Germany’, Cambridge Journal of Economics, 42(4), pp.1043-1086.